Crude oil prices are down sharply on Monday morning, after President Donald Trump, Iranian leaders and Pakistani negotiators all indicated that a deal to end the war with Iran will be signed on Friday.

President Trump posted online about the deal on Sunday evening. Oil futures prices promptly sank around 4%, after markets reopened for trading following their typical weekend break. Prices had already fallen significantly on Thursday and Friday in anticipation of a deal.

By Monday, prices were down nearly 13% from where it had been in the middle of last week. The cost of one barrel of Brent crude, the global oil benchmark, was around $83, and West Texas Intermediate, the U.S. benchmark, around $80. At one point in this conflict, global oil prices had touched $126 a barrel.

While oil prices remain elevated compared to pre-war prices, which were in the $60s, they are now cheaper than they have been at any point since the very first days of this conflict.

Cheaper crude oil should push U.S. gasoline prices down, which should in turn help with high levels of inflation. The war in Iran had driven the national average up by as much as $1.50 a gallon; prices have eased in recent weeks, as crude prices dropped on expectations of a deal to reopen the Strait of Hormuz, but gasoline remains more than a dollar higher than the pre-war average.

Trump's initial post on Sunday evening said he was authorizing "the toll free opening of the Strait of Hormuz," and directed ships to "start your engines." Before the war, approximately 20% of the world's oil and liquefied natural gas passed through that waterway, and the disruption of traffic has caused the greatest oil supply shock in history.

In a follow-up post, Trump later said that the strait would reopen "upon the signing of the Deal on Friday, for purposes of mine removal."

Markets hope this time, the deal is real

Throughout this conflict, oil prices have repeatedly fallen on headlines promising an imminent deal to reopen the strait; however, they've never dropped this low. Significantly, Pakistan's Prime Minister Shehbaz Sharif, who has played a central role negotiating between the U.S. and Iran, has confirmed that a deal has been reached.

"Washington has an incentive to avoid a spike in gasoline prices ahead of the midterms, while Tehran is seeking sanctions relief and restored export revenues, and the global economy has a strong interest in keeping the Strait of Hormuz open," writes Claudio Galimberti, the chief economist for the research firm Rystad Energy, in a note. "On rare occasions, these incentives align in a coherent way, and that is the strongest argument that this is more than another short-lived diplomatic cycle,"

While risks remain, Galimberti says, a reopening of the strait would begin to reduce global inflationary pressures, which have been mounting.

A rapid reopening of the strait would ease pressure on the world's oil consumers, particularly in Asia and Europe. However, it would not mean an immediate return to pre-war oil supply levels and prices.

"It could be months before things return to something like the way things were before the war, at least as far as flows out of the Strait of Hormuz go," says Kevin Book, a managing director at Clearview Energy Partners, an independent research firm.

That's because some oil and natural gas production fields and refineries have been taken offline, or damaged in the conflict. "The facilities that have been shut down, some of them can start fairly quickly. Others may take months," he said.

Transit takes time, too. Ships also need to move in and out of the strait, and from there around the world.

And over the past few months, the world has tapped into its stockpiles of oil in order to make up for missing supplies; refilling those inventories could keep upward pressure on oil prices for months.

Before the war began, the world had been oversupplied with oil, which was keeping prices low. Book says it's not clear whether returning to "normal" will mean returning to that status quo.

"It's not obvious that we'll be in a surplus any time soon," he says.
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